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Perspective NewsletterI started my military career in an Army Reserve unit, the Royal Regiment of Canada. It was there that I was first introduced to the “7 Ps”, an adage widely popular across the armed forces of many English-speaking nations: “Proper Planning and Preparation Prevent —- Poor Performance”. (The astute reader will notice that there are only six “Ps” in that sentence… I had to omit the fifth word to keep this letter more polite than the typical infantry soldier.)

One of the mottos of that Regiment (and, by coincidence, also of the Royal Canadian Navy where I finished my military career) is “Ready, Aye Ready”. Militaries around the world very literally live and die by the philosophy of “readiness”. Individual service members are trained, equipment is maintained, critical materials are stockpiled, resupply channels are pre-established, and strategies are continuously tested and retested under all sorts of hypothetical scenarios. Whenever a military unit isn’t actually engaged in executing a mission, it is found dedicating its time and efforts to ensuring that it will be fully ready for its next mission, whatever, whenever, and wherever that might be.

But readiness goes far beyond simply having a plan. A plan is useless if you’re unable to successfully put it into practice at the appropriate time and under whatever conditions might exist at that time. Here’s another relevant military maxim: “No battle plan ever survives initial contact with the enemy.” While there are many variations of this saying, my favorite version arises from the legendary boxer Mike Tyson who said, “Everyone has a plan until they get punched in the mouth”.

This highlights the difference between simply having a plan, and being strategically prepared. A plan is great for activities only where there is a low probability for unexpected events. For example, taking the family out for a day at the beach requires a plan. Your plan might include allowances for minor unforeseen variables like a change in weather conditions. In straightforward, generally predictable situations, having a plan is likely adequate.

But a plan by itself is insufficient when there is decent chance that entire episode goes off-script. You can’t win a battle by simply having a plan, because any semi-intelligent opponent is assuredly not going to cooperate with your plan. Under conditions of high uncertainty or against competition, you need more than just a plan. You require a strategy that allows you to observe, re-orient, make decisions, and take actions so that you can adapt in response to changing situations. This constitutes a much higher level of preparedness — one that prioritizes maintaining adaptability, so that you can still achieve your objective even if the path you take toward that objective has to change.

Which brings us to the markets. The last few weeks have offered a remarkable example of what happens when things don’t go according to plan. On New Year’s Day, nobody would have predicted what we’ve experienced so far in 2020. The coronavirus pandemic and the oil price collapse were entirely unexpected, the government mitigation responses and stimulus measures have been unprecedented, and the markets’ reactions have been stunning. Many people who thought they had ‘plans’ were entirely unprepared for the volatile conditions they found themselves in.

The New York Times published an article a few days ago entitled “I Became a Disciplined Investor Over 40 Years. The Virus Broke Me in 40 Days.” i It offers a first-hand account from an investor with decades of experience, and lays bare the difference between merely having a plan, and being prepared.

The author had a simple plan for timing his investments: “I figured that if I bought every time the market average declined by 10 percent from its previous high — the standard definition of a correction — and then bought some more after each subsequent decline of 10 percent, then I’d never be buying at the top of the cycle.” It doesn’t sound bad in theory, but it assumed he would have the both the resources and the resolve to execute the plan.

His account takes the reader through his harrowing ordeal of trying to trade amid market conditions that he and his plan had not anticipated. It started rather innocuously. The markets fell a bit, so he bought some stocks. The markets continued lower, so he eagerly bought some more, trying to time the dips and rebounds.

But that’s approximately as far as he got before the plan fell apart. The steep decline in the markets continued to unfold and he watched helplessly as net worth evaporated. “…trading was more volatile than anything I’d ever witnessed.” And he froze. He had effectively just been “punched in the mouth” and was rendered unable to continue to execute his trading plan, leaving him in a highly exposed and vulnerable position. In this particular case, he had enough resources that he wasn’t forced to sell at a loss, so he may be able to hold on and recover. But the roller coaster ride he’s had to endure is one that most families would certainly not want to stomach.

One critical element entirely absent from this investor’s plan (at least as outlined in the NYT article) is any clear definition of his goals. He was trading the market like he was in a casino, placing bets on the next roll of the dice, without any regard for WHY he was investing in the first place. His goal appears to simply be “to make more money”.

Contrast this individual’s trading plan against our approach to financial planning and goals-based investing. We don’t rely on generating profits by planning to trade our way through volatile markets. Short term market movements are impossible to predict, and as we’ve seen over the last few weeks, the possibility of getting the timing wrong, even by a single day, can have devastating consequences. We don’t even rely on a having the ability to trade stocks in the short run. Markets have halted trading repeatedly in the last few weeks. A plan that relies on being able to place orders at pre-defined moments is at risk of being derailed when markets gap up or down during trading halts.

Instead of relying on a trading plan, we depend on a broader strategy of preparedness and adaptability. Assets that are earmarked for short term goals, such as several years of spending needs, are safeguarded in cash and liquid, low-risk fixed income accounts instead of being exposed to market risks. These secure and liquid assets ensure that families will have the flexibility to adapt to ever-changing circumstances, and should ensure there is no need to worry about the daily see-sawing of stock prices. The path to the family’s goals might change and might involve more ups and downs than initially expected, but achieving that long term goal is unlikely to be compromised.

That’s the difference between merely having a plan and maintaining a state of preparedness. No successful response would have been possible were it not for the planning and preparation that was put into place in the years leading up to this market downturn.

Proper planning and preparedness allows families the ability to remain mindful of their overarching goals, positions them to observe and adapt to unexpectedly changing situations, and thereby ensures a much higher probability of achieving their goals — than if they merely had ‘a plan’.

General Dwight Eisenhower, Supreme Allied Commander of the of the Allied forces in Europe during World War II and later President of the United States said, “In preparing for battle, I have always found that plans are useless but planning is indispensable.” We would wholeheartedly agree.

Learn more about Northwood’s response to COVID-19

i https://www.nytimes.com/2020/03/27/business/stock-market-pandemic-coronavirus.html

Northwood Family Office

Russ Rodrigues

Russ Rodrigues

Russ is a member of the investment team at Northwood and is primarily responsible for economic research along with investment manager analysis, selection, and oversight.

Russ is a Chartered Financial Analyst (CFA) charterholder and a member of the Toronto CFA Society. He is certified as a Derivatives Market Specialist (DMS) and a Canadian Investment Manager (CIM) by the Canadian Securities Institute. Russ holds a Masters of Business Administration (MBA) from the Ivey School of Business at Western University, and an Bachelor of Arts Honours (BA Hons.) in Business Administration from the Royal Military College of Canada.

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